Archrock, Inc.

Good morning. Welcome to the ArchRock second quarter 2021 conference call. Your host for today's call is Megan Repine, Vice President of Investor Relations of ArchRock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Katrina. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of ArchRock, and Doug Aaron, Chief Financial Officer of ArchRock. Yesterday, RTRAC released its financial and operating results for the second quarter of 2021. If you've not received a copy, you can find the information on the company's website at www.RTRAC.com. During this call, we will make forward-looking statements within the meeting of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to our TRACS management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, and cash available for dividends. For reconciliations of these non-GAAP financial measures to our GAAP financial statements, please see yesterday's press release and our Form 8K furnished to the SEC. I'll now turn the call over to Brad to discuss our track second quarter results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. Let me start by saying that I'm pleased with our truck's performance in the second quarter of 2021. We executed on a number of strategic priorities and are driving value in this transition year. With our fleet of large horsepower assets, solid operational performance, and continued financial discipline, we delivered meaningful free cash flow during the first half of 2021. Highlights from the second quarter include that we saw further stabilization in our operations and revenue. Compared to the first quarter, our utilization was flat at 82%, and our contract operations revenue was down just 1%. We captured our highest level of horsepower bookings since the second quarter of 2019, reinforcing our confidence in this recovery. We delivered a solid contract operations gross margin percentage of 63%, largely unchanged compared to the first quarter of 2021. We maintained capital discipline, spending $39 million in total CapEx in the first half of 2021, compared to $113 million at the same point last year. We continued our commitment to return capital to shareholders, We paid $22 million in dividends with internally generated cash flow and maintained a robust dividend coverage ratio of 1.9 times. Finally, we progressed our multi-year fleet high-grading strategy. In total, we've divested 279,000 horsepower year-to-date, including 108,000 horsepower during July. These transactions improve our operating efficiency and profitability and bring forward future EBITDA, and allow us to accelerate debt repayment. I'm proud to share that the proceeds from these asset sales and strong year-to-date operational execution have accelerated our targeted debt reduction from an expected $100 million to $150 million or more during 2021, and from $250 million to $300 million or more since the end of 2019. As a late cycle participant, we expected 2021 to be a transition year as the current cycle turns from contraction to expansion. The pace of this recovery is proving to be more measured than we initially anticipated, however. Our utilization and pricing are at or near cyclical lows. At the same time, we're beginning to invest to meet the expected customer growth plans and are starting to face inflationary pressure from the tightening market and some shortages. This concurrence of lower revenue and accelerating investment is typical of the transition in our business from the end of the down cycle to the beginning of an up cycle. As with past cycles, our focus is now moving to the growth we expect to see ahead as we convert our growing backlog of compression demand to revenue and get set up to raise pricing to align with our cost structure. We expect this period to be transitory, as it has been in past cycles, and we expect to leverage the market opportunities presented by the steady, multi-decade growth cycle for national gas that we believe is now underway. We expect increasing booking activity to continue through the balance of the year, which for our truck should translate into a robust outlook for 2022 and beyond. Turning now to a deeper dive and review of the market backdrop, commodity prices strengthened further during the second quarter. Oil prices remain above $70 per barrel, supporting existing 2021 activity plans across the oil patch. The North American rig cap currently stands at approximately 470, up more than 100% from the trough. Our conversations with customers around 2022 plans are increasing in frequency and optimism, and we believe future activity is biased higher, setting the compression industry up for a stronger 2022. In the EIA's latest forecast, natural gas production remains in the 93 to 94 BCF a day range for the second half of the year, with a 2021 average of 93 BCF a day essentially flat from 2020 levels. From there, it's expected to reach 96 BCF a day by the fourth quarter of 2022, above pre-pandemic levels, and 7% higher than the low point experienced in the second quarter of 2020. Beyond the cyclical recovery currently unfolding, the positive long-term fundamentals for natural gas and therefore our compression business remain in place. Natural gas remains a cornerstone fuel to worldwide energy transition in the multi-decade forecasts published by major energy agencies. And as the oil and gas industry increases its commitment to reducing its own greenhouse gas emissions, this could further strengthen natural gas's value proposition and provide upside to long-term demand. For our track, we believe the opportunities presented by energy transition outweigh the risks. Our strategy includes a growing commitment to our ESG performance and disclosure. We plan to publish our third sustainability report in the next few weeks with 2020 data and additional disclosure enhancements. As you know, we already provide electric power compression to certain customers. This represents a small portion of our fleet today, but a key growth opportunity ahead. Moving on to our segments, contract operations revenue declined by just $2 million, or 1% in the second quarter, a significant improvement from the larger sequential declines we experienced throughout the pandemic. Compared to the first quarter, our second quarter exit fleet utilization was flat at 82%. Excluding the 12,000 active horsepower we chose to sell as part of our fleet high-grading strategy, operating horsepower declined by just 22,000 compared to the first quarter. During the second quarter, we divested 63,000 total horsepower and in July sold another 108,000 horsepower to compression providers with small horsepower strategies. This required a tremendous effort from numerous people across our organization and was a win-win for all parties involved. Including the benefit of these transactions, our large horsepower equipment, as a percentage of our operating fleet, has increased from 74% at the end of 2019 to 80% today. Pricing on our active fleet remains steady compared to the first quarter, the result of our contracting strategy and standby units returning to full monthly service rates. Revenue per horsepower was flat on a sequential basis. Looking activity during the quarter was robust and reached levels not seen since the second quarter of 2019, which should enable us to resume horsepower growth. Our gross margin percentage was roughly flat from the first quarter of 2021 and was down on a year-over-year basis. During the second quarter, we started to see higher costs due to an increase in make-ready expenses as we prepare to meet higher customer demand and are also facing rising parts, little oil, and labor expenses. The team has and will continue to optimize gross margin and work to offset inflationary pressures with tight cost control, efficiency gains, and future price increases. I also want to thank our employees for their continued hard work and commitment to safety. We achieved great safety performance with zero safety incidents reported so far in 2021. In aftermarket services, revenues were up $2 million sequentially off a seasonally low first quarter. However, results were softer than our expectations as the resumption of major maintenance by our customers has largely lagged our experience in prior cycles. This is especially true for our field service activity. I'd like to touch on our capital allocation framework, particularly as we move closer to the up cycle. As always, we will remain focused on balancing appropriate levels of investment, leverage, and return of capital to shareholders. Over the past several years, we've worked hard to build a platform that will profitably support the consistent, though relatively modest, growth and demand for natural gas compression forecasted ahead. We've modernized our fleet, invested in technology, and standardized practices in the field and across the organizations. With this solid foundation, we'll focus primarily on redeploying existing idle compression units and will responsibly increase investment in our fleet as necessary so that we have equipment available and in configurations desired by our customers. In summary, we're confident a recovery is developing. We have a lot of reasons to be excited about 2022. and we have the right people, assets, and strategy in place to optimize the results during this transition period and as this recovery takes hold. With that, I'd like to turn the call over to Doug for review of our second quarter performance and provide the latest on our 2021 outlook.